Can I 1031 a property that has a tax lien or judgment lien on it?

A lien is a payoff on the settlement statement, not a bar to the exchange

Section 1031 asks what kind of property you exchange and how you hold it, not whether creditors have claims on it. A title insurer will not insure the buyer until recorded liens are paid or released, so the settlement agent lists each payoff on the seller's side of the statement and wires it from the buyer's funds. Only the balance goes to your intermediary.

That order matters. Once the money reaches the intermediary, Reg. Section 1.1031(k)-1(g)(6) bars you from receiving or using it until the exchange ends, so a lien discovered after closing cannot be paid from the exchange account. Get the title commitment early, and order payoff letters before the closing date is set.

The payoff counts as debt relief, which the replacement must match

Reg. Section 1.1031(d)-2 treats 'any liabilities to which the property exchanged by the taxpayer is subject' as money received. A judgment or tax lien recorded against the property makes it subject to that liability, so paying it at closing is treated the same way as paying off a mortgage.

The same regulation's examples allow that relief to be offset by liabilities on the replacement property and by cash you pay. Cash you receive is not offset by debt you take on, which is why the payoff has to be matched by a larger loan or added cash rather than by leaving cash out. Replace the mortgage or add cash walks through the matching.

The regulation's text does not distinguish a lien securing a mortgage from a lien securing an unpaid tax or a court judgment, and we found no ruling applying it to a tax or judgment lien by name. Because the underlying debt may have nothing to do with the property, confirm the treatment with your CPA before you rely on new debt to offset it.

A federal tax lien needs a payoff or a discharge before the buyer will close

Under section 6321, an unpaid federal tax becomes a lien on all your property and rights to property. Section 6325(b) lets the IRS issue a certificate of discharge for a specific property, and Publication 783 explains each route: enough other property left to cover twice the liability, a payment equal to the government's interest in the property, a finding that its interest has no value, or an agreement to hold the sale proceeds in escrow subject to the IRS's claim.

The application is Form 14135. Publication 783 asks you to submit it 'at least 45 days before the transaction date', with a copy of the proposed escrow agreement or settlement statement where required.

The escrow route has an exchange cost. Proceeds held in a fund subject to the government's claim cannot also go to your intermediary, so that money is outside the exchange, and the replacement has to be financed or funded without it.

A hypothetical: an $80,000 judgment on a $1,000,000 sale

Hypothetical figures: you sell for $1,000,000. The settlement agent pays a $300,000 mortgage and an $80,000 recorded judgment, and $620,000 goes to your intermediary after closing costs are ignored for simplicity. Your debt relief is $380,000.

To defer all the gain, you buy at least $1,000,000 of replacement property, spend the full $620,000, and take on at least $380,000 of new debt or add cash to make up any shortfall. If you buy for $1,000,000 with $620,000 down and a $300,000 loan, the missing $80,000 has to come from your own cash at closing, or it is treated as boot, taxed to the extent of your gain. Run your own numbers with your CPA.

What to do before you list, and where a DST fits

Order a title search before you sign the sale contract, so every lien is known. For an IRS lien, decide which discharge route applies and file Form 14135 with time to spare; for a state tax lien or a judgment, get a written payoff figure and a release the title company will accept. Tell your intermediary and CPA the payoff amounts, because they change how much debt the replacement must carry. State withholding at closing is a separate issue, covered in state withholding at closing.

If replacing the debt is the hard part, a Delaware Statutory Trust interest with its own financing can supply the replacement debt; how that counts is in whether a DST loan counts as replacement debt.